Facilitating people ride in
new cars and paying the cost in three to five years

SHABBIR H. KAZMI, Special
Correspondent
Oct 01 - 07, 2007

At present automobile sales
are mainly driven by easy access to auto finance. Around 70% of the
total sales are through auto finance/lease. However, credit demand has
slowed down in calendar year 2007 due to rising interest rates, an
outcome of tight monetary policy being followed by the State Bank of
Pakistan.

Auto finance rate offered by
the financial institutions are from 15% to 20% per annum. As a result
of the recent increase in the discount rate, there has been an
increase in the mark-up on consumer financing which is expected to
have a dampening effect on demand.

Reportedly, consumer loans
have decelerated mainly due to higher interest rates. Due to increase
in discount rate consumer financing during January-August 2007 grew at
nearly half the rate compared to the corresponding period last year.
Within the consumer loans portfolio, car loans showed the sharpest
fall, declining to one fourth rate.

According to some analysts
there has not been any visible shift in consumer financing patterns.
However, they expect that consumer financing may respond negatively to
the interest rate hike, dampening auto financing growth. Further,
lower demand in auto financing may also result due to an increase in
prices of automobiles.

The total production of cars
and light commercial vehicles this year was 204,212 units compared to
187,436 units in the same period last year. This is a growth of 9%
compared to a CAGR of 21% over the last six years. This decline is
firstly due to an increase in the prices of some of the brands/models.
Secondly, capacities of local assemblers, producing economical cars
did not completely cater to local demand resulting in an increase in
the supply-demand gap. This resulted in longer delivery periods which
led to increases in "premium money" in the recent past.

The policies proposed in the
budget will only invoke an unnecessary rise in the end-cost borne by
customers, which is already under pressure from increased financial
costs of consumer financing and will bear a negative repression on the
domestic production. The Auto Industry Development Plan (AIDP) has
proposed import duties on completely knock-down units (CKD), CBU and
spare-parts to be reduced gradually. Moreover, the reduction will
begin from 2008-09 instead of 2007-08. Likewise, on localized parts,
CKD duty remains unchanged at 50% until 2008-09. Thereafter it would
be reduced to 45%. However, no change has been made in the duty
structure of CBU below 1500cc engine capacity.

The auto policy envisages
significant investment in the next five years, to achieve a target
production of 500,000 cars per annum. Most of this investment is being
made by the vendors for capacity expansion to meet the target. This
additional capacity will enable assemblers to meet ever increasing
demand, driven on the back of improving purchasing power.

The local manufacturers of
parts and accessories are adding on new production facilities as well
as creating new employment opportunities and generating demand for a
variety of services. Currently, about 200,000 people are employed in
automotive parts manufacturing units and it is expected to touch
250,000 in couple of years. This number does not include people
working in automobile assembly units, motorcycles assembly plants and
tractors manufacturing plants.

Currently, car ownership in
Pakistan is estimated at 8 per 1000 people, compared to 12 in India,
10 in China, 21 in Indonesia, 23 in Iran, 25 in Sri Lanka, and 31 in
the Philippines. At an average; 28 out of 1000 Asians own a car. This
indicates there is further room for expansion, not only in Pakistan
but across the region that bodes well for the local manufacturers.

One of the beneficiaries of
robust auto sales has been insurance sector. However, the growing
consensus of the leading players is that underwriting auto insurance
is becoming less attractive business. The reasons for this are
declining trend in the premium rate and rising claim to net premium
ratio. Though, the number of policies issued is on the rise but
declining premium rate is eroding profit of the insurance companies.
The leading players are also of the view that claims arising due to
theft/snatching are also eroding profit of the insurance companies.

Though, the central bank
continues to follow tight monetary policy, resulting in hike in
interest rate, there seems to be little impact on auto financing.
However, there is growing concern that probability of default is on
the rise, it may not be due to higher interest rate but certainly due
to fast eroding purchasing power.

However, financial sector
experts are of the view that people interested in acquiring
automobiles through lease/auto finance mostly belong to salaried class
and payment of monthly rental has become pinching. It is mainly due to
eroding purchasing power.

A disappointing factor is
that public transport system has the largest potential but financial
institutions are reluctant to finance the sector. The past experience
has been very bitter, be it the yellow cab scheme or the urban
transport scheme. However, financial institutions are partly
responsible for this. In an attempt to attain "political
mileage" various governments have been exploiting the
nationalized commercial banks. The balance sheet footing of private
banks is relatively much smaller as compared to "big five"
and they cannot afford to take the hit.

It is also necessary to
highlight the issue of tractor financing. In the past ZTBL used to be
the biggest provider of loans for purchasing tractors. At present the
financing by the ZTBL has shrunk to about 15% of the past lending.
Commercial banks are also not providing much financing, though, the
government claims that lending to the agriculture sector now touches
Rs 160 billion.

Interestingly, financial
institutions do not seem interested in extending credit for the
purchase of tractors, though it also acts as collateral. Lending for
the purchase of inputs is riskier because in case of any natural
calamity recovery becomes very difficult.